Paulson: Balancing act needed on loans

Treasury chief warns new laws might limit access to mortgages

September 15, 2007|By Bill Barnhart, Tribune staff reporter

The White House and Congress need to walk a fine line between assisting homeowners facing foreclosure and imposing new laws or regulations that result in fewer Americans having access to mortgages, Treasury Secretary Henry Paulson said Friday in Chicago.

Virtually every corner of the federal government, including the Federal Reserve, is under pressure to respond to a rising number of home mortgage foreclosures, especially among people living in their homes as opposed to speculating on residential properties.

One way for homeowners to prevent foreclosures has fallen victim to current mortgage lending practices, Paulson said in a wide-ranging interview at the Tribune.

Typically, homeowners no longer have a simple relationship with mortgage lenders or holders of mortgages. In the past lenders were locally based and more amenable to working out late payment problems with local customers.

"The mortgage process has been disaggregated" through global trading in mortgage-backed securities, he said. "It's not as simple as a homeowner going to their banker who makes and holds a mortgage to do a work-out."

Restoring the traditional ability of homeowners to seek payment negotiations with lenders will not be easy, he said. Mortgage originators, who typically sell the mortgages they generate, and mortgage service agencies, which may or may not have a direct stake in the mortgage, need to be the principal sources of mortgage work-outs, he said.

The complexity of mortgage finance delays rapid assistance to homeowners in peril, he said.

"The biggest challenge is finding these people early," Paulson said. "Relief is going to come when lenders are willing to provide it because they think it's in their best interest."

The Bush administration has proposed new Federal Housing Administration rules to permit lower down payments on FHA-insured mortgages and easier access to refinancing a mortgage at a lower rate.

The administration also advocates a three-year moratorium on federal income tax on amounts of a mortgage loan forgiven by a lender in a work-out or foreclosure process. Under current law any loan amount relieved by the lender becomes income to the taxpayer.

"The focus of the president's program is on the homeowners and their primary residences, not on speculators who are not living in the home," Paulson said.

In addition, the White House is examining the role of mortgage originators, credit rating agencies and the process of turning home mortgages into tradeable financial instruments, he said.

"We need to be careful as a nation that when we understand these implications and make some corrections we don't go so far that we end up restricting credit to so many people who need it," Paulson said.

On the other hand, "There are some purists who would say, 'I don't think the government should do anything.' If you are of that school of thought, I disagree with you," he said.

Democrats in Congress have proposed more direct subsidies to distressed mortgage holders and a greater cap on loans that may be purchased by government-sponsored agencies Fannie Mae and Freddie Mac.

Paulson acknowledged that recent signs of a slowdown in economic growth predate the summer's credit crunch. But he said he is not sure the White House will propose a major tax bill or economic stimulus legislation next year.

There are plans to "patch" the alternative minimum tax, a tax obligation initially intended for high-income Americans that has reached into the middle class, he said.

"If it doesn't get patched, rather than 4 million taxpayers getting hit by that there will be 25 million," Paulson said. "That will be a very cruel and unpleasant surprise to those taxpayers."

Rep. Charles Rangel (D-N.Y.), chairman of the tax-writing House Ways and Means Committee, proposed earlier this month the elimination of the alternative minimum tax.

Another focus of White House tax policy experts will be on the U.S. corporate income tax system. Paulson said the nation has fallen behind other countries, such as Germany and France, in reforming their corporate income tax system to maximize job growth and global competitiveness.

"The way we tax our global corporations shows a lack of understanding of what's going on around the world today," he said.

Next week Paulson heads for Europe, where officials have been saying that greater regulation and disclosure is needed for hedge funds and other private pools of capital.

Paulson said he hopes to convince his European counterparts that hedge funds were not responsible for current credit problems at European lenders and that the best solution to hedge fund disclosure lies in elevating public awareness of hedge fund managers who provide greater transparency to their investors.

"I don't think it's fair to blame the current issues on the proliferation of private pools of capital," he said.

Paulson, a former chief of investment banking giant Goldman Sachs who grew up in suburban Barrington, said he has no interest in returning to Illinois and running for public office on a Republican ticket.

"That wouldn't be helpful to the party," he said. "I'm not a politician."